UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 29, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4335801
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, NY 11747-8943
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, as of
August 1, 2003, was 25,943,811.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - June 29, 2003
and December 29, 2002 3
Consolidated Statements of Operations (Unaudited) - Three
and Six Months Ended June 29, 2003 and June 30, 2002 4
Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 29, 2003 and June 30, 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28-29
Item 6. Exhibits and Reports on Form 8-K 30-31
SIGNATURES 32
CERTIFICATIONS 33-34
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
JUNE 29, 2003 DECEMBER 29, 2002
----------------- -----------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 97,046 $ 101,241
Short-term investments 4,900 -
Receivables, less allowance for doubtful accounts of
$8,272 and $9,032 in 2003 and 2002, respectively 133,039 125,078
Prepaid expenses and other current assets 8,973 10,534
----------------- ------------------
Total current assets 243,958 236,853
Fixed assets, net 13,122 13,025
Other assets 15,554 14,553
----------------- ------------------
Total assets $ 272,634 $ 264,431
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,513 $ 16,865
Payroll and related taxes 12,616 12,377
Medicare liabilities 12,212 11,880
Cost of claims incurred but not reported 31,079 27,899
Obligations under insurance programs 37,950 37,829
Other accrued expenses 27,120 25,664
----------------- ------------------
Total current liabilities 138,490 132,514
Other liabilities 17,683 18,869
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 25,927,663 and 2,593 2,639
26,385,210 shares, respectively
Additional paid-in capital 256,035 263,024
Accumulated deficit (142,167) (152,615)
----------------- ------------------
Total shareholders' equity 116,461 113,048
----------------- ------------------
Total liabilities and shareholders' equity $ 272,634 $ 264,431
================= ==================
See notes to consolidated financial statements.
3
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- ------------------------------
JUNE 29, 2003 JUNE 30, 2002 JUNE 29, 2003 JUNE 30, 2002
--------------- --------------- -------------- ---------------
Net revenues $ 208,446 $ 195,623 $ 410,462 $ 388,422
Cost of services sold 138,822 138,892 272,072 268,078
--------------- --------------- -------------- ---------------
Gross profit 69,624 56,731 138,390 120,344
Selling, general and administrative expenses (62,341) (101,248) (123,594) (162,110)
Depreciation and amortization (1,730) (1,814) (3,475) (3,741)
Interest income, net 139 383 182 579
--------------- --------------- -------------- ---------------
Income (loss) before income taxes from continuing
operations 5,692 (45,948) 11,503 (44,928)
Income tax expense (benefit) 445 (12,270) 1,055 14,664
--------------- --------------- -------------- ---------------
Income (loss) from continuing operations 5,247 (33,678) 10,448 (59,592)
Discontinued operations, net of tax - 184,953 - 192,141
--------------- --------------- -------------- ---------------
Income before cumulative effect of accounting change 5,247 151,275 10,448 132,549
Cumulative effect of accounting change, net of tax - - - (190,468)
--------------- --------------- -------------- ---------------
Net income (loss) $ 5,247 $ 151,275 $ 10,448 $ (57,919)
=============== =============== ============== ===============
Basic earnings per share:
Income (loss) from continuing operations $ 0.20 $ (1.29) $ 0.39 $ (2.29)
Discontinued operations, net of tax - 7.08 - 7.39
Cumulative effect of accounting change, net of tax - - - (7.33)
--------------- --------------- -------------- ---------------
Net income (loss) $ 0.20 $ 5.79 $ 0.39 $ (2.23)
=============== =============== ============== ===============
Weighted average shares outstanding 26,530 26,143 26,613 25,993
=============== =============== ============== ===============
Diluted earnings per share:
Income (loss) from continuing operations $ 0.19 $ (1.29) $ 0.38 $ (2.29)
Discontinued operations, net of tax - 7.08 - 7.39
Cumulative effect of accounting change, net of tax - - - (7.33)
--------------- --------------- -------------- ---------------
Net income (loss) $ 0.19 $ 5.79 $ 0.38 $ (2.23)
=============== =============== ============== ===============
Weighted average shares outstanding 27,490 26,143 27,635 25,993
=============== =============== ============== ===============
See notes to consolidated financial statements.
4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
---------------------------------------
June 29, 2003 June 30, 2002
------------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 10,448 $ (57,919)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Income from discontinued operations - (192,141)
Cumulative effect of accounting change - 190,468
Depreciation and amortization 3,475 3,741
Provision for doubtful accounts 3,608 3,014
Gain on sale / disposal of businesses and fixed assets (180) -
Stock option tender offer - 21,388
Deferred income taxes - 14,664
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (11,569) 897
Prepaid expenses and other current assets 1,613 (6,990)
Current liabilities 6,358 35,564
Change in net assets held for sale - 3,685
Other, net (1,020) (5,237)
------------------- -----------------
Net cash provided by operating activities 12,733 11,134
------------------- -----------------
INVESTING ACTIVITIES:
Purchase of fixed assets - continuing operations (3,928) (882)
Purchase of fixed assets - discontinued operations - (2,121)
Proceeds from sale of assets / business 200 207,500
Acquisition of businesses (1,300) -
Purchase of short-term investments (14,900) -
Maturities of short-term investments 10,035 -
------------------- -----------------
Net cash (used in) provided by investing activities (9,893) 204,497
------------------- -----------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 822 6,581
Repurchases of common stock (7,857) -
Debt issuance costs - (1,321)
Cash distribution to shareholders - (203,983)
Payments for stock option tender - (21,388)
------------------- -----------------
Net cash (used in) financing activities (7,035) (220,111)
------------------- -----------------
Net change in cash, cash equivalents and restricted cash (4,195) (4,480)
Cash, cash equivalents and restricted cash:
Beginning of period 101,241 107,144
------------------- -----------------
End of period $ 97,046 $ 102,664
=================== =================
See notes to consolidated financial statements.
5
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting Policies
-------------------
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides home
health services throughout the United States and delivers a wide range of
services principally through its Gentiva Health Services and CareCentrix(R)
brands ("Home Health Services business").
The accompanying interim consolidated financial statements are unaudited,
but have been prepared by Gentiva pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management, include
all adjustments necessary for a fair presentation of results of operations,
financial position and cash flows for each period presented. Results for interim
periods are not necessarily indicative of results for a full year. The year-end
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.
CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents. Restricted cash
represents segregated cash funds in a trust account designated as collateral
under the Company's insurance programs. The Company, at its option, may access
the cash funds in the trust account by providing equivalent amounts of
alternative security. The Company classifies investments with an original
maturity of more than three months and less than one year on the acquisition
date as short-term investments. Short-term investments, which consisted of
investments in U.S. Government obligations having a maturity of less than one
year at June 29, 2003, are classified as "held to maturity" investments and are
reported at amortized cost which approximates fair value.
STOCK BASED COMPENSATION PLANS
During the first six months of fiscal 2003, the Company granted 691,400
stock options to officers, directors and employees under its existing option
plans at an average exercise price of $8.79. At June 29, 2003, there were
2,799,683 options outstanding at a weighted average exercise price of $6.05.
The Company has chosen to adopt the disclosure only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"), and continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
imputed cost of stock option grants and discounts offered under the
6
Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the
vesting provisions of the individual grants, but not charged to expense.
The following table presents net income (loss) and basic and diluted income
(loss) per common share had the Company elected to recognize compensation cost
based on the fair value at the grant dates for stock option awards and discounts
for stock purchases under the Company's ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 29, 2003 JUNE 30, 2002 JUNE 29, 2003 JUNE 30, 2002
------------- -------------- ------------- -------------
Net income (loss) - as reported $ 5,247 $ 151,275 $ 10,448 $ (57,919)
Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax - 12,803 - 12,803
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (470) (737) (820) (1,348)
---------- ------------ ----------- -----------
Net income (loss) - pro forma $ 4,777 $ 163,341 $ 9,628 $ (46,464)
========== ============ =========== ===========
Basic income (loss) per share - as reported $ 0.20 $ 5.79 $ 0.39 $ (2.23)
Basic income (loss) per share - pro forma $ 0.18 $ 6.25 $ 0.36 $ (1.79)
Diluted income (loss) per share - as reported $ 0.19 $ 5.79 $ 0.38 $ (2.23)
Diluted income (loss) per share - pro forma $ 0.17 $ 6.25 $ 0.35 $ (1.79)
The weighted average fair value of the Company's stock options granted
during the first six months of fiscal 2003 was $5.22, calculated using the
Black-Scholes option-pricing model. The fair value of options granted in fiscal
2003 was estimated on the date of grant with the following weighted average
assumptions: risk-free interest rate of 3.60 percent; dividend yield of 0
percent; expected lives of six to eight years; and volatility of 60 percent.
2. Background and Basis of Presentation
------------------------------------
On June 13, 2002, the Company sold substantially all of the assets of its
specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo"). See Note 4.
The operating results of the SPS business, including corporate expenses
directly attributable to SPS operations, as well as the gain on the sale, net of
transaction costs and related income taxes, are reflected as discontinued
operations in the accompanying consolidated statement of operations for the
three months and six months ended June 30, 2002. Continuing operations includes
the results of the Home Health Services business, including corporate expenses
that did not directly relate to SPS, as well as restructuring and special
charges. Results of all prior periods have been reclassified to conform to this
presentation.
3. Earnings (Loss) Per Share
-------------------------
Basic and diluted earnings (loss) per share for each period presented has
been computed by dividing net income (loss) by the weighted average number of
shares
7
outstanding for each respective period. The computations of the basic and
diluted per share amounts for the Company's continuing operations were as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- ----------------------------------
JUNE 29, 2003 JUNE 30, 2002 JUNE 29, 2003 JUNE 30, 2002
----------------- ---------------- ---------------- ----------------
Income (loss) from continuing operations $ 5,247 $ (33,678) $ 10,448 $ (59,592)
- ------------------------------------------------------------------------------------- ----------------------------------
Basic weighted average
common shares outstanding 26,530 26,143 26,613 25,993
Shares issuable upon the assumed exercise of
stock options and in connection with the ESPP
using the treasury stock method 960 - 1,022 -
----------------- ---------------- ---------------- ----------------
Diluted weighted average
common shares outstanding 27,490 26,143 27,635 25,993
----------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------------------------- ----------------------------------
Income (loss) from continuing operations
per common share:
Basic $ 0.20 $ (1.29) $ 0.39 $ (2.29)
Diluted $ 0.19 $ (1.29) $ 0.38 $ (2.29)
- ------------------------------------------------------------------------------------- ----------------------------------
For the second quarter and first six months of fiscal 2002, in accordance
with Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS 128"), the common shares used in computing the diluted per share amount
for continuing operations shall be used for discontinued operations, cumulative
effect of accounting change and net income, although the impact may be
antidilutive.
For the second quarter and first six months ended June 30, 2002, diluted
weighted average common shares outstanding excludes the incremental 1.2 million
shares and 1.3 million shares, respectively, that would be issued upon the
assumed exercise of stock options and in connection with the ESPP using the
treasury stock method, since their inclusion would be antidilutive on earnings.
4. Acquisition and Disposition of Businesses
-----------------------------------------
ACQUISITION OF FIRST HOME CARE BUSINESS
On March 28, 2003, the Company completed the purchase of certain assets and
the business of First Home Care - Houston, Inc. and FHCH, Inc. pursuant to an
asset purchase agreement for cash consideration of $1.3 million. The purchase
price allocation consisted of goodwill of $1.2 million and assets and other
intangibles of $0.1 million.
SALE OF SPECIALTY PHARMACEUTICAL SERVICES BUSINESS
On June 13, 2002, the Company consummated the sale of its SPS business to
Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset
purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002,
between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.
Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired the
SPS business in consideration for:
8
o the payment to the Company of a cash amount equal to $207.5 million
(before a $0.9 million reduction resulting from a closing net book
value adjustment); and
o 5,060,976 shares of Accredo common stock.
Based on the closing price of the Accredo common stock on June 13, 2002
($51.89 per share), the value of the stock consideration was $262.6 million.
In connection with the SPS Sale, the Company's Board of Directors declared
a dividend, payable to shareholders of record on June 13, 2002, of all the
common stock consideration and substantially all the cash consideration received
from Accredo. The cash consideration received by the Company before the closing
net book value adjustment was $207.5 million; however, the amount distributed to
the Company's shareholders was reduced by $3.5 million to $204 million as a
holdback for income taxes the Company expected to incur on the proceeds received
in excess of $460 million as detailed in the Company's proxy statement, dated
May 10, 2002. The special dividend, which was delivered to the distribution
agent on June 13, 2002 for payment to the Company's shareholders, resulted in
shareholders of record on the record date receiving $7.76 in cash and .19253
shares of Accredo common stock (valued at $9.99 per share based on the June 13,
2002 closing price of $51.89 per share of Accredo common stock) for each share
of Gentiva common stock held. The total value of the special dividend amounted
to $17.75 per share. Cash was paid in lieu of fractional shares.
In connection with the SPS Sale, the Company incurred $16.2 million in
transaction costs which related to investment banking fees, legal and accounting
costs, change in control and other employee related payments and miscellaneous
other costs. SPS revenues and operating results for the periods presented were
as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
-------------------------------------------
Net revenues $ 146,534 $ 323,319
==================== ====================
Operating results of discontinued SPS business:
Income before income taxes $ 813 $ 11,238
Income tax expense (96) (1,313)
-------------------- --------------------
Net income 717 9,925
-------------------- --------------------
Gain on disposal of SPS business, including
transaction costs of $13.7 million and
$16.2 million, respectively 208,803 206,291
Income tax expense (24,567) (24,075)
-------------------- --------------------
Gain on disposal, net of tax 184,236 182,216
-------------------- --------------------
Discontinued operations, net of tax $ 184,953 $ 192,141
==================== ====================
5. Restructuring and Other Special Charges
---------------------------------------
During the second quarter of fiscal 2002, the Company recorded
restructuring and other special charges aggregating $46.1 million. These
restructuring and other special charges are further described below.
9
RESTRUCTURING CHARGES
BUSINESS REALIGNMENT ACTIVITIES
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its split-off from its former parent company in March 2000. These charges
are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the quarter and six months
ended June 30, 2002. As of June 29, 2003, $3.2 million of these charges remain
unpaid, representing lease and other associated costs which will be paid over
the remaining lease terms. These unpaid restructuring charges are reflected in
other accrued expenses in the accompanying consolidated balance sheet as of June
29, 2003.
SPECIAL CHARGES
OPTION TENDER OFFER
During the second quarter ended June 30, 2002, the Company effected a cash
tender offer for all outstanding options to purchase its common stock for an
aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the quarter and six months ended June 30, 2002.
SETTLEMENT COSTS
The Company recorded a $7.7 million charge in the second quarter of fiscal
2002 to reflect settlement costs relating to the FREDRICKSON V. OLSTEN HEALTH
SERVICES CORP. AND OLSTEN CORPORATION lawsuit as well as estimated settlement
costs related to government inquiries regarding cost reporting procedures
concerning contracted nursing and home health aide costs (see Note 9). These
costs are reflected in selling, general and administrative costs in the
accompanying consolidated statement of operations for the quarter and six months
ended June 30, 2002.
INSURANCE COSTS
The Company recorded a special charge of $6.3 million in the second quarter
of fiscal 2002 related primarily to a refinement in the estimation process used
to determine the Company's actuarially computed workers compensation and
professional liability insurance
10
reserves. This special charge is reflected in cost of services sold in the
accompanying consolidated statement of operations for the quarter and six months
ended June 30, 2002.
ASSET WRITEDOWNS AND OTHER
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the quarter and six months ended June 30, 2002.
6. Goodwill and Other Intangible Assets ("SFAS 142")
-------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the
criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment and an impairment charge is recorded in the
periods in which the recorded carrying value of goodwill and certain intangibles
is more than its estimated fair value. The Company adopted SFAS 142 as of the
beginning of fiscal 2002. The provisions of SFAS 142 require that a transitional
impairment test be performed as of the beginning of the year the statement is
adopted. The provisions of SFAS 142 also require that a goodwill impairment test
be performed annually or on the occasion of other events that indicate a
potential impairment.
Based on the results of the transitional impairment tests, the Company
determined that an impairment loss relating to goodwill had occurred and
recorded a pre-tax, non-cash charge of $217.3 million, as cumulative effect of
accounting change in the accompanying consolidated statement of operations for
the first six months of fiscal 2002. The Company recorded a deferred tax benefit
of approximately $66 million resulting from this non-cash charge and increased
its tax valuation allowance by the same amount. The deferred tax benefit was
recorded by eliminating a deferred tax liability of approximately $27 million
and recording a deferred tax asset of approximately $39 million. See Note 10 to
the consolidated financial statements.
7. Revolving Credit Facility and Restricted Cash
---------------------------------------------
The Company's credit facility, which was entered into on June 13, 2002,
provides up to $55 million in borrowings, including up to $40 million which is
available for letters of credit. The Company may borrow up to a maximum of 80
percent of the net amount of eligible accounts receivable, as defined, less any
reasonable and customary reserves, as defined, required by the lender. Borrowing
availability under the credit facility was reduced by $10 million until such
quarter in 2003 in which the trailing 12 month earnings before interest, taxes,
depreciation and amortization ("EBITDA"), excluding certain restructuring
11
costs and special charges, as defined, exceeded $15 million. As of March 30,
2003, the trailing 12 month EBITDA threshold was achieved and the availability
restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the credit
facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25
percent or the lender's prime rate plus 1.25 percent. In addition, the Company
was required to pay a fee equal to 2.5 percent per annum of the aggregate face
amount of outstanding letters of credit. Beginning in 2003, the applicable
margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees
decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent,
respectively, provided that the Company's trailing 12 month EBITDA, excluding
certain restructuring costs and special charges, as defined, is in excess of $20
million. The Company was also subject to an unused line fee equal to 0.50
percent per annum of the average daily difference between the total revolving
credit facility amount and the total outstanding borrowings and letters of
credit. For 2003, the unused credit line fee decreases to 0.375 percent provided
the minimum EBITDA target described above is achieved. The higher margins and
fees are subject to reinstatement in the event that the Company's trailing 12
month EBITDA falls below $20 million. The Company met this minimum EBITDA
requirement as of March 30, 2003, with the rate reduction effective June 1,
2003, and continued to meet this requirement as of June 29, 2003.
Total outstanding letters of credit were approximately $27.6 million at
December 29, 2002 and $20.6 million as of June 29, 2003. The letters of credit,
which expire one year from date of issuance, were issued to guarantee payments
under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of June 29, 2003.
During the first six months of fiscal 2003, the Company entered into a
trust agreement and segregated $17.3 million of cash funds in a trust account to
provide additional collateral and to replace approximately $7 million of letters
of credit and a $5 million surety bond which had been used as collateral under
the Company's insurance programs. These funds are considered restricted cash and
are reported as part of cash, cash equivalents and restricted cash in the
accompanying consolidated balance sheet as of June 29, 2003. Interest on the
funds in the trust account accrues to the Company. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security, including letters of credit and surety bonds.
The credit facility, which expires in June 2006, includes certain covenants
requiring the Company to maintain a minimum tangible net worth of $101.6
million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio,
as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions,
capital expenditures and dispositions of assets and other limitations with
respect to the Company's operations. The credit facility further provides that
if the agreement is terminated for any reason, the Company must pay an early
termination fee equal to $275,000 if the facility is terminated during the
period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is
terminated from June 13, 2004 to June 12, 2005. There is no fee for termination
of the facility subsequent to June 12, 2005. Loans under the credit
12
facility are collateralized by all of the Company's tangible and intangible
personal property, other than equipment. As of June 29, 2003, the Company was in
compliance with these covenants.
8. Shareholders' Equity
--------------------
Changes in shareholders' equity for the six months ended June 29, 2003 were
as follows (in thousands):
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
--------- ---------- ---------- ----------
Balance at December 29, 2002 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net income - - 10,448 10,448
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (413,904 shares) 41 781 - 822
Repurchase of common stock at cost (871,451 shares) (87) (7,770) - (7,857)
--------- ---------- ---------- ----------
Balance at June 29, 2003 $ 2,593 $ 256,035 $ (142,167) $ 116,461
========= ========== ========== ==========
Comprehensive income amounted to $5.2 million and $151.3 million for the
second quarter of fiscal 2003 and fiscal 2002, respectively, and comprehensive
income of $10.4 million and a comprehensive loss of $57.9 million were recorded
for the first six months of fiscal 2003 and fiscal 2002, respectively.
On May 16, 2003 the Company announced that its Board of Directors had
authorized the Company to repurchase and formally retire up to 1,000,000 shares
of its outstanding common stock. The repurchases were to occur periodically in
the open market or through privately negotiated transactions based on market
conditions and other factors. As of June 29, 2003, the Company had repurchased
871,451 shares of its common stock at an average cost of $9.03 per share and a
total cost of approximately $7.9 million. As of July 23, 2003, the Company had
repurchased all 1,000,000 shares of its common stock at an average cost of $9.08
per share and a total cost of approximately $9.1 million.
On August 7, 2003, the Company's Board of Directors authorized the Company
to repurchase and formally retire up to an additional 1,500,000 shares of its
outstanding common stock. The repurchases will occur periodically in the open
market or through privately negotiated transactions based on market conditions
and other factors.
9. Legal Matters
-------------
LITIGATION
In addition to the matters referenced in this Note 9, the Company is party
to certain legal actions arising in the ordinary course of business, including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
13
COOPER V. GENTIVA CARECENTRIX, INC. T/A/D/B/A/ GENTIVA HEALTH SERVICES,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002, and discovery has now
commenced. The Company has denied the allegations of wrongdoing in the complaint
and intends to defend itself vigorously in this matter. On May 19, 2003, the
Company filed a motion for summary judgment on the issue of liability. Until
there is a ruling on that motion, the Company is unable to assess the probable
outcome or potential liability, if any, arising from this matter; therefore, a
range of damages, if any, cannot be determined.
FREDRICKSON V. OLSTEN HEALTH SERVICES CORP. AND OLSTEN CORPORATION, Case
No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
Ohio. In November 2000, the jury in this age-discrimination lawsuit returned a
verdict in favor of the plaintiff against Olsten consisting of $675,000 in
compensatory damages, $30 million in punitive damages and an undetermined amount
of attorneys' fees. The jury found that, although Olsten had lawfully terminated
the plaintiff's employment, its failure to transfer or rehire the plaintiff
rendered Olsten liable to the plaintiff. Following post-trial motion practice by
both parties, the trial court, in May 2001, denied all post-trial motions, and
entered judgment for the plaintiff for the full amount of compensatory and
punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938.
In June 2001, defendants timely filed a Notice of Appeal with the Court of
Appeals. This matter has been settled, and settlement costs were recorded as
part of special charges during the second quarter of fiscal 2002 (see Note 5).
GOVERNMENT MATTERS
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports, which were
filed with the Centers for Medicare and Medicaid Services ("CMS"), and were
subject to audit by the fiscal intermediary engaged by CMS. In connection with
the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary
made certain audit adjustments related to the methodology used by the Company to
allocate a portion of its residual overhead costs. The Company filed cost
reports for years subsequent to 1997 using the fiscal intermediary's
methodology. The Company believed its methodology used to allocate such overhead
costs was accurate and consistent with past practice accepted by the fiscal
intermediary; as such, the Company filed appeals with the Provider Reimbursement
Review Board ("PRRB") concerning this issue with respect to cost reports for
14
the years 1997, 1998 and 1999. The Company's consolidated financial statements
for the years 1997, 1998 and 1999 had reflected use of the methodology mandated
by the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an
Administrative Resolution relating to the issues covered by the appeals pending
before the PRRB. Under the terms of the Administrative Resolution, the fiscal
intermediary agreed to reopen and adjust the Company's cost reports for the
years 1997, 1998 and 1999 using a modified version of the methodology used by
the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000. The process for the fiscal intermediary to (i)
reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs
through the issuance of Notices of Program Reimbursement ("NPRs") and (iii) make
appropriate payments to the Company, is not expected to be completed until early
2004. Cost reports relating to years subsequent to 1997 will be reopened after
the process for the 1997 cost reports is completed. The Company believes that
the reopening of and adjustments to its prior years' cost reports may have a
positive impact on its financial position; however, the financial impact of the
implementation of the Administrative Resolution cannot be specifically
determined at this time. To date, the Company has not reflected any anticipated
recovery from the appeals.
On April 17, 2003, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, Office of
Investigations. The subpoena seeks information regarding the Company's
implementation of prior settlements with the government, the implementation of
the Company's corporate integrity agreements and the Company's treatment on cost
reports of employees engaged in sales and marketing efforts. The Company is
cooperating with the government in responding to the subpoena and has engaged in
discussions with the government regarding the timing and scope of production.
With respect to the cost report issues, the government has preliminarily agreed
to narrow the scope of production to January 1, 1998 through September 30, 2000.
To the Company's knowledge, the government has not filed a complaint against the
Company.
In February 2000, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, Office of
Investigations. The subpoena related to its agencies' cost reporting procedures
concerning contracted nursing and home health aide costs. This matter has been
settled and settlement costs were recorded as part of special charges during the
second quarter of fiscal 2002 (see Note 5).
INDEMNIFICATIONS
Gentiva became an independent, publicly owned company on March 15, 2000,
when the common stock of the Company was issued to the stockholders of Olsten
Corporation, a Delaware corporation ("Olsten"), the former parent corporation of
the Company (the "Split-Off"). In connection with the Split-Off, the Company
agreed to assume, to the extent permitted by law, and to indemnify Olsten for
the liabilities, if any, arising out of the home health services business.
The Company and Accredo have agreed to indemnify each other for breaches of
representations and warranties of such party or the non-fulfillment of any
covenant or
15
agreement of such party in connection with the sale of the SPS business. The
Company has also agreed to indemnify Accredo for the retained liabilities and
for tax liabilities and Accredo has agreed to indemnify the Company for assumed
liabilities and the operation of the SPS business after the closing of the
acquisition. The representations and warranties generally survive for the period
of two years after the closing of the acquisition, except that:
o representations and warranties related to health care compliance
survive for three years after the closing of the acquisition;
o representations and warranties related to title of the assets and
sufficiency of assets and employees survive for the applicable statute
of limitations period; and
o representations and warranties related to tax matters survive until
thirty days after the expiration of the applicable tax statute of
limitations period, including any extensions of the applicable period,
subject to certain exceptions.
Accredo and the Company generally may recover indemnification for a breach
of a representation or warranty only to the extent a party's claim exceeds $1
million for any individual claim, or exceeds $5 million in the aggregate,
subject to certain conditions and only up to a maximum amount of $100 million.
These indemnification rights are the exclusive remedy from and after the
closing of the acquisition, except for the right to seek specific performance of
any of the agreements in the related Asset Purchase Agreement, in any case where
a party is guilty of fraud in connection with the acquisition, and with respect
to tax liabilities and obligations.
On May 6, 2003, the Company received correspondence from Accredo giving the
Company notice of Accredo's indemnification rights for any breach under the
Asset Purchase Agreement related to the adequacy of the accounts receivable
reserves in accordance with Section 8.3 of the Asset Purchase Agreement;
however, no breach of a representation or warranty was asserted against the
Company in the correspondence.
10. Income Taxes
------------
The Company recorded state income and federal alternative minimum taxes of
approximately $0.4 million and $1.1 million for the second quarter and first six
months ended June 29, 2003. The Company's effective tax rate of approximately
9.2 percent for the first six months of fiscal 2003 was lower than the statutory
income tax rate due to the reversal of a portion of the valuation allowance
relating to the realization of tax benefits associated with a net operating loss
carryforward and other net deferred tax assets.
A federal and state income tax benefit of $12.3 million and a federal and
state income tax expense of $14.7 million were recorded for the second quarter
and first six months of fiscal 2002 relating to continuing operations. During
the first quarter of fiscal 2002, income tax expense from continuing operations
was $26.9 million which reflects an additional valuation allowance recorded
against certain deferred tax assets in connection with the adoption of SFAS 142
and the subsequent write-off of goodwill; the corresponding tax benefit for the
same amount was recorded in the cumulative effect of accounting change line item
as
16
reported in the accompanying consolidated statement of operations during the
first six months of fiscal year 2002.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
JUNE 29, 2003 DECEMBER 29, 2002
---------------------- ---------------------
Deferred tax assets
Reserves and allowances $ 22,764 $ 24,543
Net operating loss and other carryforwards (Federal and state) 6,004 5,993
Intangible assets 31,540 33,202
Depreciation 226 332
Other (74) 574
Less: valuation allowance (59,737) (63,892)
---------------------- ---------------------
Total deferred tax asset 723 752
---------------------- ---------------------
Deferred tax liabilities
Capitalized software (723) (752)
---------------------- ---------------------
Total deferred tax liability (723) (752)
---------------------- ---------------------
Net deferred tax asset (liability) $ - $ -
====================== =====================
At June 29, 2003, the Company had a federal net operating loss carryforward
of $13.8 million, which will begin to expire by 2020. Because of the uncertainty
of the ultimate realization of net deferred tax assets, a valuation allowance is
maintained relating to deferred tax assets that are not otherwise used to offset
deferred tax liabilities. The benefits associated with approximately $19 million
of deferred tax assets related to stock option compensation deductions, when
ultimately realized, will be credited to shareholders' equity.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects" and similar expressions, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based upon the
Company's current plans, expectations and projections about future events.
However, such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for health care reform;
o changes in Medicare and Medicaid reimbursement levels;
17
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue associated with
major payor sources;
o ability of customers to pay for services;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical accounting
policies.
Forward-looking statements are found throughout "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Quarterly Report on Form 10-Q. The reader should not place undue reliance
on forward-looking statements, which speak only as of the date of this report.
The Company is not obligated to publicly release any revisions to
forward-looking statements to reflect unforeseen or other events after the date
of this report. The Company has provided a detailed discussion of risk factors
in its 2002 Annual Report on Form 10-K and various filings with the Securities
and Exchange Commission. The reader is encouraged to review these risk factors
and filings.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial position. This discussion and analysis should be
read in conjunction with the Company's consolidated financial statements and
related notes included elsewhere in this report.
GENERAL
The Company's results of operations are impacted by various regulations and
other matters that are implemented from time to time in its industry, some of
which are described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 2002 and in other filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
REVENUES
Net revenues increased by $12.8 million, or 6.6 percent to $208.4 million
for the quarter ended June 29, 2003 as compared to the quarter ended June 30,
2002. For the six months ended June 29, 2003, net revenues increased by $22.0
million, or 5.7 percent to $410.5 million as compared to the six months ended
June 30, 2002. Revenue growth in the second quarter and first six months of
fiscal 2003 was reported in each major payor group, driven primarily by
increases in the Company's commercial insurance business.
For the quarter ended June 29, 2003 as compared to the quarter ended June
30, 2002, net revenues from Commercial Insurance and Other payors increased by
$10.2 million or 9.0 percent to $123.8 million, Medicare increased by $1.4
million or 3.5 percent to $42.0 million,
18
and Medicaid and Other Government payors increased by $1.2 million or 2.8
percent to $42.7 million.
For the six months ended June 29, 2003 as compared to the six months ended
June 30, 2002, net revenues from Commercial Insurance and Other payors increased
by $18.6 million or 8.4 percent to $240.9 million, Medicare increased by $1.8
million or 2.2 percent to $84.5 million, and Medicaid and Other Government
payors increased by $1.6 million or 2.0 percent to $85.0 million.
Revenue growth from Commercial Insurance and Other payors was driven by a
combination of pricing and volume increases from existing customers and new
contracts that were signed during the past year. Of the 9.0 percent and 8.4
percent increases in net revenues for the second quarter and first six months of
2003, new contracts from Commercial Insurance and Other payors accounted for 4.8
percent and 3.7 percent, respectively.
Medicare revenues were negatively impacted by an overall 4.9 percent
reduction in Medicare reimbursement rates (approximately $2.1 million for the
second quarter of fiscal 2003 and $4.2 million for the first six months of
fiscal 2003), which became effective for Medicare patients beginning in October
2002. Medicare revenues were also negatively impacted by the elimination of the
rural add-on provision ($0.5 million for the second quarter of fiscal 2003 and
$0.6 million for the first six months of fiscal 2003) for home health services,
which became effective April 1, 2003. During the second quarter and first six
months of fiscal 2002, Medicare revenues were negatively impacted by a $2.5
million revenue adjustment relating to partial episode payments ("PEPs") as
further discussed under management's analysis of Gross Profit below.
Medicaid and Other Government revenues increased for the quarter and six
months ended June 29, 2003 despite revenue reductions related to more
restrictive eligibility requirements in some states and lower reimbursement
rates in certain other states. In addition, the Company elected to terminate or
reduce its participation in certain low-margin, hourly Medicaid and state and
county programs.
GROSS PROFIT
Gross profit was approximately $69.6 million for the second quarter ended
June 29, 2003 and $56.7 million for the quarter ended June 30, 2002. As a
percentage of net revenues, gross profit margins increased from 29.0 percent for
the quarter ended June 30, 2002, to 33.4 percent for the quarter ended June 29,
2003. The gross profit margin for the second quarter of fiscal 2002 was
negatively impacted by a special charge of approximately $6.3 million or 3.2
percent associated with insurance costs and a revenue adjustment of $2.5 million
or 0.9 percent related to a change in the estimated amount of the repayment to
Medicare for PEPs from the inception of the Prospective Payment System of
reimbursement ("PPS") in October 2000 through June 30, 2002.
Gross profit was approximately $138.4 million for the first six months
ended June 29, 2003 as compared to $120.3 million for the first six months ended
June 30, 2002. As a percentage of net revenues, gross profit margins increased
from 31.0 percent for the first six months ended June 30, 2002, to 33.7 percent
for the first six months ended June 29, 2003. Gross profit margins for the first
six months of fiscal 2002 were negatively impacted by 2.0
19
percent due to the $6.3 million special charge associated with insurance costs
and the $2.5 million revenue adjustment related to PEPs that were recorded in
the second quarter of fiscal 2002. The remaining change in gross profit margins
for the six months ended June 29, 2003 was due to improvements in utilization in
both commercial insurance business and Medicare (0.3 percent), and reductions in
medical supply costs (0.3 percent) and workers compensation costs (0.9 percent),
offset somewhat by the Medicare rate decrease (0.8 percent).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, including depreciation and
amortization, decreased $39.0 million to $64.1 million for the quarter ended
June 29, 2003, as compared to $103.1 million for the quarter ended June 30,
2002.
For the six months ended June 29, 2003, selling general and administrative
expenses, including depreciation and amortization, decreased $38.8 million to
$127.1 million compared to $165.9 million for the corresponding period in fiscal
2002.
These decreases related to restructuring and special charges of $46.1
million, of which approximately $40 million was reflected in selling, general
and administrative expenses in the accompanying consolidated statements of
operations for the second quarter and six months ended June 30, 2002. See Note 5
to the consolidated financial statements for further discussion of the
restructuring and special charges.
In addition, for both the second quarter and six month periods of fiscal
2003, increases in sales and field administrative expenses due to headcount
additions and costs relating to the Healthcare Insurance Portability and
Accountability Act of 1996 ("HIPAA") training and the completion of the
technology refresh program were partially offset by reductions in corporate
administrative expenses resulting from restructuring efforts following the SPS
Sale in the second quarter of fiscal year 2002.
INTEREST INCOME, NET
Net interest income was approximately $0.1 million for the quarter ended
June 29, 2003 and $0.4 million for the quarter ended June 30, 2002. Net interest
income represented interest income of approximately $0.4 million for the second
quarter of fiscal 2003 and $0.8 million for the second quarter of fiscal 2002,
partially offset by fees relating to the revolving credit facility and
outstanding letters of credit.
Net interest income was approximately $0.2 million for the six months ended
June 29, 2003 compared to $0.6 million for the six months ended June 30, 2002.
Net interest income for the first six months of fiscal years 2003 and 2002
represented interest income of $0.7 million and $1.5 million, respectively,
partially offset by interest expense of $0.5 million and $0.9 million,
respectively.
Interest income declined in the second quarter and first six months of
fiscal 2003 as compared to the second quarter and first six months of fiscal
2002 due to a decline in interest rates on cash, cash equivalents and restricted
cash and, to a lesser extent, a decrease in average cash balances during the
period. Interest expense declined in the fiscal 2003 periods due to a reduction
in the average outstanding letters of credit, as well as fees associated with
the unused portion of the credit facility.
20
INCOME TAXES
The Company recorded state income and federal alternative minimum taxes of
approximately $0.4 million and $1.1 million for the second quarter and first six
months ended June 29, 2003. The Company's effective tax rate of approximately
9.2 percent for the first six months of fiscal 2003 was lower than the statutory
income tax rate due to the reversal of a portion of the valuation allowance
relating to the realization of tax benefits associated with a net operating loss
carryforward and other net deferred tax assets. Because of the uncertainty of
the ultimate realization of net deferred tax assets, a valuation allowance is
maintained relating to deferred tax assets that are not otherwise used to offset
deferred tax liabilities. However, if the recent trend of income continues, it
is possible that deferred tax assets will be recognized in the near term.
Therefore, the requirement for a valuation allowance is being monitored each
quarter by management. The Company had a federal net operating loss carryforward
of $13.8 million as of June 29, 2003.
A federal and state income tax benefit of $12.3 million and a federal and
state income tax expense of $14.7 million were recorded for the second quarter
and first six months of fiscal 2002 relating to continuing operations. During
the first quarter of fiscal 2002, income tax expense from continuing operations
was $26.9 million, which reflects an additional valuation allowance recorded
against certain deferred tax assets in connection with the adoption of SFAS 142
and the subsequent write-off of goodwill; the corresponding tax benefit for the
same amount was recorded in the cumulative effect of accounting change line item
as reported in the accompanying consolidated statement of operations during the
first six months of fiscal year 2002.
NET INCOME (LOSS)
For the second quarter of fiscal 2003, net income was $5.2 million, or
$0.19 per diluted share, compared with net income of $151.3 million, or $5.79
per share, for the corresponding period of 2002. Total Company net income in the
second quarter of fiscal 2002 included a loss from continuing operations of
$33.7 million, or $1.29 per share and income from discontinued operations, net
of tax, of $185.0 million, or $7.08 per share.
For the first six months of fiscal 2003, net income was $10.4 million, or
$0.38 per diluted share, compared with a net loss of $57.9 million, or $2.23 per
share for the first six months of fiscal 2002. Total Company net loss of $57.9
million for the first six months of fiscal 2002 included a loss from continuing
operations of $59.6 million, or $2.29 per share, income from discontinued
operations, net of tax, of $192.1 million, or $7.39 per share, and a loss
relating to the cumulative effect of accounting change, net of tax, of $190.5
million, or $7.33 per share.
The loss from continuing operations during the second quarter and first six
months of fiscal 2002 includes $46.1 million in restructuring and special
charges. See Note 5 to the consolidated financial statements.
21
Discontinued operations reported in the 2002 periods included the operating
results of the SPS business and the gain, net of related transaction costs and
income taxes, associated with the June 13, 2002 sale of the SPS business to
Accredo. The cumulative effect of the accounting change, which reflects the net
write-off of substantially all of the Company's goodwill, represented the
non-cash charge resulting from the adoption of SFAS 142 (Goodwill and Other
Intangible Assets) during the first quarter of 2002.
For a discussion of the Company's critical accounting policies, please
refer to Gentiva's fiscal 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 25, 2003.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payor arrangements.
Days Sales Outstanding ("DSO") decreased by 1 day from December 29, 2002 to
58 days at June 29, 2003, consistent with the DSO as of March 29, 2003. Working
capital at June 29, 2003 was $105 million, an increase of $1 million as compared
to $104 million at December 29, 2002, primarily due to:
o a $5 million increase in short-term investments offset by a $4 million
decrease in cash, cash equivalents and restricted cash;
o a $8 million increase in accounts receivable;
o a $2 million decrease in prepaid expenses and other assets; and
o a $6 million increase in current liabilities for cost of claims
incurred but not reported ($3 million), accounts payable ($1 million),
and other current liabilities ($2 million).
The Company participates in the Medicare, Medicaid and other federal and
state healthcare programs. Revenue mix by major payor classifications are as
follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------------------- ---------------------------------------
JUNE 29, 2003 JUNE 30, 2002 JUNE 29, 2003 JUNE 30, 2002
---------------- ----------------- ----------------- -----------------
Medicare 20% 21% 21% 21%
Medicaid and Other Government 21 21 21 22
Commercial Insurance and Other 59 58 58 57
---------------- ----------------- ----------------- -----------------
100% 100% 100% 100%
================ ================= ================= =================
On October 1, 2002, the reduction in home health payment limits mandated
under the Balanced Budget Act of 1997 became effective. The change in payment
limits reduced payments under the Medicare program to home health agencies for
open episodes of care on or after October 1, 2002 by approximately 7 percent.
Simultaneous with this reduction, market basket rate increases of 2.1 percent
adjusted for certain wage indices were also
22
implemented, resulting in an overall reduction in reimbursement rates of
approximately 4.9 percent. This reduction had a negative impact of approximately
$2.1 million on net revenues for the quarter ended June 29, 2003 and $4.2
million for the six months ended June 29, 2003. Although a further market basket
rate increase is scheduled to become effective October 1, 2003, that increase is
currently under Congressional review. In addition, Medicare reimbursement
related to home health services performed in specifically defined rural areas of
the country was further reduced as the ten percent rural add-on provision for
home health services expired as of April 1, 2003. The elimination of the ten
percent rural add-on provision negatively impacted the Company's net revenues by
approximately $0.5 million and $0.6 million for the second quarter and the first
six months ended June 29, 2003, respectively. Further reductions in Medicaid
reimbursement rates and limitations on eligibility requirements may also occur.
There are certain standards and regulations that the Company must adhere to
in order to continue to participate in these programs, including compliance with
the Company's corporate integrity agreement. As part of these standards and
regulations, the Company is subject to periodic audits, examinations and
investigations conducted by, or at the direction of, governmental investigatory
and oversight agencies. Periodic and random audits conducted or directed by
these agencies could result in a delay or adjustment to the amount of
reimbursements received under these programs. Violation of the applicable
federal and state health care regulations can result in the Company's exclusion
from participating in these programs and can subject the Company to substantial
civil and/or criminal penalties. The Company believes it is currently in
compliance with these standards and regulations.
The Company is party to a contract with CIGNA Health Corporation ("Cigna"),
pursuant to which the Company provides or contracts with third party providers
to provide home nursing services, acute and chronic infusion therapies, durable
medical equipment, and respiratory products and services to patients insured by
Cigna. For the second quarter and first six months of fiscal 2003, Cigna
accounted for approximately 37 percent and 38 percent of the Company's total net
revenues compared to approximately 39 percent and 38 percent for the second
quarter and first six months of fiscal 2002, respectively. The Company has
renewed the contract with Cigna for the seventh consecutive year, with the
current contract expiring on December 31, 2003, with an option to renew. If
Cigna chose to terminate or not renew the contract, or to significantly modify
its use of the Company's services, there could be a material adverse effect on
the Company's cash flow.
Net revenues generated under capitated agreements with managed care payors
were approximately 15 percent of total net revenues for the second quarter and
16 percent for the first six months of fiscal 2003 and 16 percent for the second
quarter and first six months of fiscal 2002. Fee-for-service contracts with
other commercial payors are traditionally one year in term and renewable
automatically on an annual basis, unless terminated by either party.
The Company's credit facility provides up to $55 million in borrowings,
including up to $40 million which is available for letters of credit. The
Company may borrow up to a maximum of 80 percent of the net amount of eligible
accounts receivable, as defined, less any reasonable and customary reserves, as
defined, required by the lender. Borrowing availability under the credit
facility was reduced by $10 million until such quarter in 2003 in which the
23
trailing 12 month EBITDA, excluding certain restructuring costs and special
charges recorded by the Company during fiscal 2002, as defined, exceeded $15
million. As of March 30, 2003, the trailing 12 months EBITDA threshold was
achieved and the availability restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the credit
facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25
percent or the lender's prime rate plus 1.25 percent. In addition, the Company
was required to pay a fee equal to 2.5 percent per annum of the aggregate face
amount of outstanding letters of credit. Beginning in 2003, the applicable
margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees
decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent,
respectively, provided that the Company's trailing 12 month EBITDA, excluding
certain restructuring costs and special charges, as defined, is in excess of $20
million. The Company was also subject to an unused line fee equal to 0.50
percent per annum of the average daily difference between the total revolving
credit facility amount, as defined, and the total outstanding borrowings and
letters of credit. For 2003, the unused credit line fee decreases to 0.375
percent provided the minimum EBITDA target described above is achieved. The
higher margins and fees are subject to reinstatement in the event that the
Company's trailing 12 month EBITDA falls below $20 million. The Company met this
minimum EBITDA requirement as of March 30, 2003, with the rate reduction
effective June 1, 2003 and continued to meet this requirement as of June 29,
2003.
Total outstanding letters of credit were $20.6 million as of June 29, 2003.
The letters of credit, which expire one year from date of issuance, were issued
to guarantee payments under the Company's workers compensation program and for
certain other commitments. There were no borrowings outstanding under the credit
facility as of June 29, 2003. As of June 29, 2003, the Company had borrowing
capacity under the credit facility, after adjusting for outstanding letters of
credit, of approximately $34 million.
The credit facility, which expires in June 2006, includes certain covenants
requiring the Company to maintain a minimum tangible net worth of $101.6
million, minimum EBITDA as defined, and a minimum fixed charge coverage ratio,
as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions,
capital expenditures and dispositions of assets and other limitations with
respect to the Company's operations. The credit facility further provides that
if the agreement is terminated for any reason, the Company must pay an early
termination fee equal to $275,000 if the facility is terminated during the
period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is
terminated from June 13, 2004 to June 12, 2005. There is no fee for termination
of the facility subsequent to June 12, 2005. Loans under the credit facility are
collateralized by all of the Company's tangible and intangible personal
property, other than equipment.
The credit facility includes provisions, which, if not complied with, could
require early payment by the Company. These include customary default events,
such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration of other financial obligations
and change in control provisions. In addition, these provisions include an
account obligor, whose accounts are more than 25 percent of all accounts of the
24
Company over the previous 12-month period, canceling or failing to renew its
contract with the Company and ceasing to recognize the Company as an approved
provider of health care services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company does not have any
trigger events in the credit facility that are tied to changes in its credit
rating or stock price. As of June 29, 2003, the Company was in compliance with
these covenants.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk but is substantially self-insured for most
of these claims. The Company recognizes its obligations associated with these
programs in the period the claim is incurred. The Company estimates the cost of
both reported claims and claims incurred but not reported, up to specified
deductible limits, based on its own specific historical claims experience and
current enrollment statistics, industry statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers compensation
claims and individual professional liability claims up to $500,000 per incident
which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter.
The Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers compensation program are guaranteed by
letters of credit and segregated cash balances.
CAPITAL EXPENDITURES
The Company's capital expenditures for the six months ended June 29, 2003
were $3.9 million as compared to $0.9 million for the same period in fiscal
2002. The Company intends to make investments and other expenditures to, among
other things, upgrade its computer technology and system infrastructure and
comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2003 will range between $9 million
and $12 million. Management expects that the Company's capital expenditure needs
will be met through operating cash flow and available cash reserves.
CASH RESOURCES AND OBLIGATIONS
The Company had cash, cash equivalents and restricted cash of approximately
$97 million and short term investments of approximately $5 million as of June
29, 2003. The restricted cash relates to cash funds of $17.3 million that have
been segregated in a trust account to provide additional collateral and to
replace approximately $7 million of letters of credit and a $5 million surety
bond which had been used as collateral under the Company's insurance programs.
Interest on the funds in the trust account accrues to the Company. The Company,
at its option, may access the cash funds in the trust account by providing
equivalent amounts of alternative security, including letters of credit and
surety bonds.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made over the next
twenty-four months. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
25
On May 16, 2003, the Company announced that its Board of Directors had
authorized the Company to repurchase and to formally retire up to 1,000,000
shares of its outstanding common stock. The repurchases were to occur
periodically in the open market or through privately negotiated transactions
based on market conditions and other factors. As of June 29, 2003, the Company
had repurchased 871,451 shares of its common stock at an average cost of $9.03
per share and at a total cost of approximately $7.9 million. As of July 23,
2003, the Company had repurchased all 1,000,000 shares of its common stock at an
average cost of $9.08 per share and at a total cost of approximately $9.1
million. On August 7, 2003, the Company's Board of Directors authorized the
Company to repurchase and formally retire up to an additional 1,500,000 shares
of its outstanding common stock. The repurchases will occur periodically in the
open market or through privately negotiated transactions based on market
conditions and other factors.
Management expects that the Company's working capital needs for fiscal 2003
will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of cash would require the approval of both the Company's Board of Directors
and its lender. If cash flows from operations, cash resources or availability
under the credit facility fall below expectations, the Company may be forced to
delay planned capital expenditures, reduce operating expenses, seek additional
financing or consider alternatives designed to enhance liquidity.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At June 29, 2003, the Company had no long-term debt and no significant
capital lease obligations.
The Company had total letters of credit outstanding under its credit
facility of approximately $27.6 million at December 29, 2002 and $20.6 million
at June 29, 2003. The letters of credit, which expire one year from date of
issuance, are issued to guarantee payments under the Company's workers
compensation program and for certain other commitments. The Company has the
option to renew these letters of credit or set aside cash funds in a segregated
account to satisfy the Company's obligations as further discussed in the
"Liquidity and Capital Resources" section under the section "Cash Resources and
Obligations".
The Company has no other off-balance sheet arrangements and has not entered
into any transactions involving unconsolidated, limited purpose entities or
commodity contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise. The Company had no
interest rate exposure on fixed rate debt or other market risk at June 29, 2003.
26
Item 4. Controls and Procedures
-----------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) for the Company. The Company's Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days before the filing
date of this quarterly report, have concluded that the Company's disclosure
controls and procedures are adequate and effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in its periodic SEC filings.
CHANGE IN INTERNAL CONTROLS.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of the evaluation. As a result, no corrective actions were taken.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 9 to the consolidated financial statements included in this
report for a description of legal matters and pending legal
proceedings.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on May 16, 2003.
(c) i) The following individuals were elected as Class III directors by
votes as follows:
------------------------- ------------------ -------------------
Name Votes FOR Votes WITHHELD
------------------------- ------------------ -------------------
Stuart R. Levine 25,221,801 360,910
------------------------- ------------------ -------------------
Mary O'Neil Mundinger 25,531,864 50,847
------------------------- ------------------ -------------------
Stuart Olsten 25,523,908 58,803
------------------------- ------------------ -------------------
ii) The proposal to ratify and approve the appointment of
PricewaterhouseCoopers LLP as independent public accountants of
the Company for 2003 was approved by votes as follows:
-------------------------------- --------------------------------
FOR: 18,973,679
-------------------------------- --------------------------------
AGAINST: 6,583,988
-------------------------------- --------------------------------
ABSTAIN: 25,044
-------------------------------- --------------------------------
BROKER NONVOTES: 0
-------------------------------- --------------------------------
Item 5. Other Information
-----------------
In connection with a July 19, 1999 settlement with various government
agencies, Olsten executed a corporate integrity agreement with the Office of
Inspector General of the Department of Health and Human Services, which will
remain in effect until August 18, 2004. The corporate integrity agreement
applies to the Company's businesses that bill the federal government health
programs directly for services, such as its nursing brand (but excludes the SPS
business), and focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of claims. Under the
corporate integrity agreement, the Company is required, for example, to maintain
a corporate compliance officer to develop
28
and implement compliance programs, to retain an independent review organization
to perform annual reviews and to maintain a compliance program and reporting
systems, as well as to provide certain training to employees.
The Company's compliance program is required to be implemented for all
newly established or acquired business units if their type of business is
covered by the corporate integrity agreement. Reports under the integrity
agreement are to be filed annually with the Department of Health and Human
Services, Office of Inspector General. After the corporate integrity agreement
expires, the Company is to file a final annual report with the government. The
Company believes it is in compliance with the corporate integrity agreement and
has timely filed all required reports. If the Company fails to comply with the
terms of its corporate integrity agreement, the Company will be subject to
penalties.
29
Item 6. Exhibits and Reports On Form 8-K
--------------------------------
(a) Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of
Company. (1)
3.2 Certificate of Correction to Certificate of
Incorporation, filed with the Delaware Secretary of
State on July 1, 2002. (2)
3.3 Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of Series A
Junior Participating Preferred Stock. (1)
4.3 Form of Certificate of Designation of Series A
Cumulative Non-Voting Redeemable Preferred
Stock. (3)
99.1 Certification of Chief Executive Officer dated
August 7, 2003 pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer dated
August 7, 2003 pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
- ---------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement of Company on Form S-4, dated January 19, 2000
(File No. 333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for the
quarterly period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement of Company on Form S-4, dated February 4, 2000
(File No. 333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement of Company on Form S-4, dated February 9, 2000
(File No. 333-88663).
* Filed herewith
30
(b) Reports On Form 8-K
-------------------
On April 10, 2003, the Company filed a report on Form 8-K (i) reporting in
Item 5 a typographical error that appeared in the Company's 2002 Annual Report
on Form 10-K, (ii) furnishing in Item 7 as an exhibit a Presentation of Adjusted
EBITDA contained in the Company's 2002 Annual Report to Shareholders and (iii)
reporting in Item 9 (as required information under Item 12) certain information
as to the presentation of Adjusted EBITDA, a non-GAAP financial measure, in the
Company's 2002 Annual Report to Shareholders.
On May 6, 2003, the Company filed a report on Form 8-K (i) furnishing in
Item 7 as an exhibit a press release covering the Company's 2003 first quarter
consolidated earnings and (ii) reporting in Item 9 (as required information
under Item 12) the issuance of the Company's press release on the subject of its
2003 first quarter consolidated earnings.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: August 7, 2003 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: August 7, 2003 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
32
CERTIFICATIONS
I, Ronald A. Malone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 7, 2003
/s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
33
CERTIFICATIONS
I, John R. Potapchuk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 7, 2003
/s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
34